2 min read.Updated: 26 Dec 2019, 11:42 PM ISTR. Sree Ram
Weighing on investor sentiments are the below-par return ratios
The company is estimated to generate a return on equity of a mere 7% per annum in the current and next fiscal years
Tata Power Co. Ltd emerged as a successful bidder to distribute electricity in five regions in Odisha. Tata Power will own a majority stake (51%) in the venture with the Odisha government owning the rest.
Distribution businesses require lower capital than a power generation plant. Further, licence holders are allowed to earn fixed returns on investments. They can optimize the returns by reducing the aggregate technical and commercial (AT&C) losses, which in the current case is as high as 33%.
Tata Power has a proven track record of successfully lowering the AT&C losses in the Delhi power distribution business and can replicate its expertise in Odisha thereby optimising its returns. CESC Ltd is another case in point. The company manages to earn more than the return allowed by the regulator for its Kolkata power distribution business by keeping the AT&C losses in check, said Swarnim Maheshwari, analyst at Edelweiss Securities Ltd.
“We peg returns in initial years at about ₹25 crore (at 15.5% return), though Tata Power can improve these to 20% plus easily by leveraging its distribution experience to cut AT&C losses (a big potential)," Maheshwari wrote in a note.
The initial returns may look meagre. But as Tata Power steps up investments and expands the regulated asset base (thereby expanding the scope for fixed returns), the Odisha distribution licence business can generate sizeable earnings. Edelweiss Securities estimates the Odisha distribution business to generate around 4% of Tata Power’s profit within the next couple of years.
But investors are not counting the gains yet. Shares of Tata Power lost 0.5% so far this week. To be sure, the stock has lost more than a quarter of its value in the past one year, even as the company moved to add more regulated businesses, where it was assured of minimum returns.
Weighing on investor sentiments are the below-par return ratios. The company is estimated to generate a return on equity of a mere 7% per annum in the current and next fiscal years. The bugbear remains the Mundra power plant, a large investment that has gone awry. Pending the tariffs revision by state utilities, the power plant continues to lose money, undermining Tata Power’s earnings.
The company has stepped up efforts to reduce the balance-sheet leverage through exit of non-core investments. But as of September, consolidated debt is lower by just 2% from the September 2016 levels. The divestments are at several stages of approvals and the management expects proceeds of nearly $1 billion in 12-18 months. This should help the company reduce debt and raise funds for future investments. However, given the limited progress till now, investors are understandably wary.